A 401k, or a cabin

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The comparison

1. A 401k, or a 401 cabin
2. When the rate of return is the same
3. What each one does to your tax bill

Living with it

1. Limits, access and use
2. What happens when you sell
3. Being forced to sell
4. The match, and what rent does to it
5. Whether it can pay for college

A 401k, or a 401 cabin

Would you rather have a 401k or would you rather have this 401 cabin? Let's think about that for a minute. How does a cabin or a condo compare to a 401k? Well, let's start off by talking about rate of return.

Did you know that going back 25 years in the S&P 500, the actual return on the S&P 500 accounting for all the ups and downs is around 5.7%. Now, let's say that we go back 25 years and look at this cabin. Would it have appreciated by around five to six percent in the last 25 years? The reality of it is is that real estate can appreciate at 5 to 7% and money in the stock market can also go up by around 5 to 7%.

When the rate of return is the same

So let's start off by saying that the rate of return is equal just for sake of argument and say both the 401k cabin and the 401k both have a good rate of return. Now, what about the fact that they both get taxdeerred growth? That's right. If your 401k grows in value, it grows tax deferred.

If this cabin grows in value, it also grows tax deferred. So, let's go ahead and let's give tax deferred to both of them. Okay. Now, what about taxes in general?

What each one does to your tax bill

Do you save money on your taxes if you put money into a 401k? That is a very common misunderstanding. The reality of it is is that it reduces your income, but the taxes are actually postponed until later. So, are you really saving money in taxes by putting money into a 401k or are you just delaying them?

And if so, the question is, are you delaying them to where you might be in a higher tax bracket if taxes go up in the future, or do you think taxes will ever come down? Something to think about. I'm going to say that since I bought this cabin this year and I know that I was able to reduce my income by $450,000 through bonus depreciation thanks to the big, beautiful bill. You're able to buy a vacation rental.

You're able to get a cost segregation study done. And you're able to reduce your income, your active taxable income, a W2 income or a 1099 income. You can reduce it by roughly 30% of the purchase price. So, this cabin actually reduced my tax my taxable income by $450,000 this year.

I would say that's massive tax savings to the 401 cabin. I would say it wins on taxes every single time. Okay. Now, what about annual limits?

Limits, access and use

Your 401k has annual limits. I can buy as much real estate as I want every year. I'm going to say that goes to the 401 cabin. What about getting access to it?

Have you ever accessed your 401k? Probably not, right? Unless maybe you've taken a loan against it. But my guess is is that you're not really accessing your 401k.

However, we are here. You could probably see my son and his friend in the hot tub back behind me. We are enjoying this cabin. So, I am going to give access to the 401 cabin.

What happens when you sell

All right. How about when we sell? How do we sell a 401k? Well, you take money out.

So, when you're ready to retire, you're going to take money out of your 401k. And when you do, you're going to be taxed as ordinary income. However, if you sell real estate, you're taxed at a capital gains rate. It's much better for most people to pay capital gains tax than it is ordinary income tax.

However, I can also do a 1031 exchange if I sell my real estate into another property. Something to consider. Or of course, that's going to go to the 401 cabin over here. Or if we die, when we die, did you know that when you die, all the money in your 401k is going to be added to your income in the year of your death?

That's going to create a major taxable income that year and the government could get a large chunk if not more than half of your 401k when you die. However, if I die and I leave this cabin to my kids, they get what they call a step up in basis. All real estate is going to be appreciated and then it's going to there's going to be a new line in the sand when you die. And that that line in the sand is what they call a step up in basis.

So, if this cabin grows to be worth $5 million before I die, my kids will inherit it at that $5 million. And then if they sell it 10 years later, they only have to pay capital gains on the difference between what it was worth when they inherited it and when they sell it. So, step up in basis, huge benefit to the 401 cabin. Also, you have the choice to sell if you want to sell or not.

Being forced to sell

If you don't want to sell in a 401k, you are forced to sell. You're forced to take the money out. Starting at age 72, you have to start taking the money out because the government wants those taxes that you deferred, right? Okay.

Huge advantage over here to the cabin. And I'm going to show you my favorite memories. Have you ever taken a picture with your 401k statement in your family? Are you just so excited all the time?

Every day you just think about how much you love that 401k. Any happy memories that you can think about? Well, if you were to look out over here, you would see that we are here by a lake that our family loves to go boating on. We love to enjoy boating on this lake.

We just got back from an ATV ride not too long ago. We're sitting here enjoying the hot tub. you can enjoy your cabin and you're not going to enjoy your 401k until you finally retire. Once you retire, then you can start taking money out of the 401k and then you might be able to enjoy it.

But I'm saying during your working years, you're probably not going to enjoy your 401k very much. But man, the 401k lifetime of memories. Now, I know what you might be saying. You might be saying, "Now, wait a minute.

The match, and what rent does to it

What about the match? I get a match on my 401k. Okay, great. Let's talk about the match.

Let's say that you get a 50 cents on the dollar match. Or maybe you're lucky and you get a dollar for dollar match. But I'll bet you most of you are putting in more than the match, aren't you? So maybe you get a little match on your 401k.

However, if I wanted to, I could charge rent to rent out my 401 cabin. I could rent it out every month. I could rent it out for just from time to time for friends and family if I wanted to. But you could charge rent and get more than your mortgage payment.

Now think about that. If you could charge rent and get more than your mortgage payment, that's more than a dollar for-doll match. Right? Now, what if you don't get more than what your mortgage payment is?

It's okay because even if you are spending, let's say, $3,000 a month on a mortgage for your cabin and you're only collecting $2,000 a month in rent, it's okay because it's still has it still has all these benefits over here. The rent could also be considered just icing on the cake. So any money that you collect from your 401 cabin is a bonus. You're not losing money by paying on a mortgage payment on your cabin, even if you don't collect any rent.

Whether it can pay for college

And oh, wait a minute. I forgot. What about college? That's right.

Can your 401k pay for college? No, it can't. Or you definitely probably don't want to use it to pay for college. But guess what?

I can take income cash flow from my cabin to pay for my kids' college without having a negative impact on the cash flow that it's going to give me in retirement. Now, think about that for a minute. Whatever cash flow I get from this cabin could pay for my kids' college, but it will not hurt whatever cash flow I get in retirement. So, if you would like to buy a cabin or a condo to pay for your kids' college and to pay for your retirement, then I would choose, if I were you, I would choose the 401 condo or a 401 cabin or just a 401 vacation rental of any kind.

And I can promise you it will be way better than your 401k. So, when you're considering how much money you can put towards a vacation rental to get all those tax benefits, which oh, and by the way, may even give some of you financial aid. That's right. By lowering your income, some of you might qualify for need-based financial aid.

The benefits just keep piling up on your 401 cabin. So, if you want to learn more about how to use a 401 cabin for retirement and for your college funding, go ahead and click the link below and we will talk to you